Michael Simpson: The Truth About Raising Startup Capital

I recently spoke to Michael Simpson, who is the co-author, with Seth Goldstein, of The Secret of Raising Money and co-founder of DJZ. Michael worked in investment banking for two years after graduating from Yale. Simpson’s company is funded by Kleiner Perkins, Google Ventures, Index Ventures, True Ventures and more. He managed the process for a $3 million debt and equity capital raise and personally raised hundreds of thousands from angels and venture capitalists. He has two years of mergers and acquisitions investment banking experience at Greenhill & Co.

In the following interview, Simpson talks about what most entrepreneurs don’t know about raising capital, the most common mistakes entrepreneurs make, why not all entrepreneurs should try and get funding and his best advice to aspiring entrepreneurs.

The Secret of Raising Money – MIchael Simpson

Dan Schawbel: What do most entrepreneurs not know about raising capital?

Michael Simpson: Many think that early stage investment decisions are primarily based on reason and logic, when the reality is that emotion and momentum often play just as big of a role. Scarcity and social proof, in particular, can influence decisions heavily. Social Proof is the idea that investors are more likely to invest in your company if others are already invested, or at least showing interest. It is the herd instinct: If everybody else is doing it then it must be good. Scarcity is the idea that an investor will be significantly more interested in participating in your financing round if he believes that space is running out. Sufficient scarcity triggers a fear within an investor that he may be passing up on a big opportunity, increasing the chance he will invest. It is FOMO at its finest.

Schawbel: What are the most common mistakes entrepreneurs make when they pitch venture capitalists?

Simpson: Here are three key ones that we see come up very frequently:

1. No demo Many founders do not prepare a product demo – whether that’s a workable prototype that an investor can play with, or a walk-through of the product lead by the founder. This is a big missed opportunity. Watching a live demo is far more engaging than listening to a founder pontificate in front of slides. Investors (like everyone else) have very short attention spans, and demos are a great way to capture interest.

2. Failure to create a dialogue A great pitch is a two-way conversation, not a one-way monologue.A 30-minute talk delivered as you go through a powerpoint deck is almost always less…